Dual Qualified Donor Advised Funds – A Tax Efficient Vehicle for Gifting as an American in Britain
We often associate Christmas as a time for giving but there is no reason why those with charitable intentions must wait until the festive period to make a difference.
We often associate Christmas as a time for giving but there is no reason why those with charitable intentions must wait until the festive period to make a difference. Instead, as we enter the new (US tax) year, now is as good a time as any to consult with your wealth manager and tax adviser about developing a gifting strategy into your financial plan and discussing some of the tax efficient vehicles available to help maximise your charitable donations.
There are of course several ways individuals can give to others. It can be non-financial, like volunteering your time and effort to specific charities or causes or financial, like using direct gifts or special vehicles such as Private Foundations or DAFs.
DAFs, in particular, have been growing in popularity over the last few years and with good reason. They are an extremely powerful tool for anyone who is looking to gift capital to charitable causes and using a dual qualified DAF provides additional benefits to dual US and UK taxpayers. But what are they?
1) What are DAFs?
A Donor Advised Fund, or DAF, is a charitable investment fund, administered by a public charity, that is formed for the sole purpose of supporting charitable organisations on behalf of an individual, a family or an organisation. Donors can make an irrevocable charitable contribution, receive a tax benefit immediately and then allocate charitable gifts from the fund at some point in the future.
While the gifts remain inside the fund, they can be invested in a tax-free environment and so any future gains will not be subject to taxes. This, in turn, allows assets earmarked for charitable causes to grow tax efficiently overtime and ultimately ends up with more funds available to make an impact.
2) Benefits of DAFs
There are countless benefits of charitable giving in general but there are some that DAFs specifically offer:
- Removes administration burden – DAFs are typically quick and easy to set up and often only require account opening paperwork to be completed (along with the standard AML (Anti-Money Laundering) checks etc) to get things started. Once your DAF is opened, the DAF administrators can relieve you of the administration duties of making donations, leaving you with more time to focus on which causes you would like to help.
- No annual distribution requirements – Unlike Private Foundations, which must distribute at least 5% assets annually, DAFs have no annual distribution requirements and so individuals can benefit from the additional flexibility on timing of distributions. This allows donors to receive the upfront benefits of funding their DAF today with no time pressure on choosing which causes to support.
- Small minimum investment amounts make them readily accessible – DAFs can be opened with relatively small sums (as little as £1,000 in some instances) which, compared to Private Foundations (which often have relatively high annual operating expenses), make DAFs more accessible to almost anyone with charitable intentions. The relatively small initial amounts also afford individuals to choose whether to donate a lump sum or make small contributions over time.
- The choice of confidentiality – with DAFs, you have the ability to name your fund whatever you like and donors can choose whether they share their personal details with the donee or to remain anonymous.
- Financial education and bringing the family together – we often see cases where families use their DAF to help educate their children about wealth, budgeting, dealing with professional intermediaries and having a positive impact in the world. Not only that but our experience is that it really helps unite many families when deciding, as a group, which charities they would like to support and giving everyone a chance to present a case for a cause close to their hearts.
- Potential for UK IHT Savings – As registered charities, individuals can list their DAF as a beneficiary of their estate upon death and, if they choose to leave 10% or more, then their estate could benefit from a reduced UK IHT tax liability of 36% (down from 40%).
- Ability to donate assets with imbedded unrealised gains – DAFs can accept gifts of securities and so contributing appreciated assets can allow individuals to avoid realising capital gains tax whilst simultaneously funding their future charitable donations.
As you can see, DAFs provide several attractive benefits and features for those looking to enhance their philanthropic giving. That said, when dealing with dual US/ UK taxpayers, a dual qualified DAF can provide even greater advantages that are too good to miss out on.
Benefits of using a Dual Qualified DAF
Many charitable organisations are considered to be qualified non-profit organisations in one jurisdiction or the other and Dual Qualified DAFs are charitable investment funds which are recognised in both the US and the UK. As Americans living in the UK are generally subject to income tax in both the UK and the US, there are several benefits of being structured in this way, but it stems from the fact that they can provide tax incentives in both jurisdictions. We will work through an example below but, ultimately, they allow donors to efficiently reduce the net cost of their donation and significantly boost the end contribution to the charity or cause.
Under current US tax law and practice, when donating to a US qualified charity ((a 501(c)(3) organisation), an individual can receive a US income tax deduction if they itemise their deductions as opposed to claiming the standard deduction. So, for example, if a 37% taxpayer contributes the equivalent of £100,000 into a US qualified DAF, they will have the opportunity to save £0.37 on the £ and will receive a tax deduction of up to £37,000.
Similarly, when donating to a UK charity, the donation will qualify for UK income tax relief. In addition, the donation should qualify for UK Gift Aid which will increase the value of your donation by 25%. So, for example, if a 45% rate individual taxpayer contributes £100,000 to a UK qualified DAF, the donation with Gift Aid will be £125,000 and your additional claim back from HMRC would be £31,250 (this is calculated by the difference in tax rates (45% (Additional Rate Tax Band) - 20% (Basic Rate Tax Band)) x gross donation of £125,000).
Another neat piece of planning for US taxpayers, resident in the UK and with “Non-Remittable”/ “Mixed” funds, is that you can gift those appreciated securities into an offshore account of the dual qualified DAF and not have any capital gains tax to pay on the contribution. This in turn provides a good use of funds that would have otherwise been subject to further UK taxes upon remittance into the UK.
How can MASECO Help?
MASECO is not a registered charity and so is unable to offers DAFs directly as part of our service. Instead, our key role is around:
- Working with clients to help them assess their charitable goals and ambitions, whilst also making sure that they are aware of the different strategies and structures available to them.
- Organising sessions dedicated to helping clients, and the wider family, explore which types of organisations or causes they want to help.
- Analysing how it all ties into their wider financial and estate plans.
Once the clients have decided a suitable path forward, we can then introduce them to our network of dedicated US-UK charities that specialise in operating dual qualified DAFs. It is these charities, such as CAF, NPT Transatlantic and Prism, that can then help facilitate the family’s charitable donations (ensuring that they qualify for dual tax relief) and can help onward grants be made to organizations that can make an impact in the desired areas.
By working with organisations who offer the dual tax flow-through mechanism, MASECO can help clients take advantage of Donor Advised Fund services and aid their donations to be tax effective on both sides of the Atlantic.
The Legal Stuff
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The views expressed herein do not necessarily reflect the views of MASECO as a whole or any part thereof. All investments involve risk and may lose value. The value of your investment can go down depending upon market conditions and you may not get back the original amount invested. Your capital is always at risk. This article does not take into account the specific goals or requirements of individuals and is not intended to be, nor should be construed as, investment or tax advice. Information contained in this article is based on MASECO’s understanding of current tax law and legislation which is subject to change. MASECO Private Wealth is not a tax specialist. Your ability to benefit from any of the tax mitigation planning mentioned in this article will depend on your personal circumstances. The levels, and bases, of tax relief is subject to change. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy. We strongly recommend that every client seeks their own tax advice prior to acting on any of the tax mitigation opportunities described in this article.
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